When gray is good: Gray markets and market-creating investments

Romana L. Autrey, Francesco Bova, David A. Soberman

Research output: Contribution to journalArticlepeer-review

Abstract

Gray markets arise when an intermediary buys a product in a lower-priced, often emerging market and resells it to compete with the product's original manufacturer in a higher priced, more developed market. Evidence suggests that gray markets make the original manufacturer worse off globally by eroding profit margins in developed markets. Thus, it is interesting that many firms do not implement control systems to curb gray market activity. Our analysis suggests that one possible explanation lies at the intersection of two economic phenomena: firms investing to build emerging market demand, and investments conferring positive externalities (spillovers) on a rival's demand. We find that gray markets amplify the incentives to invest in emerging markets, because investments increase both emerging market consumption and the gray market's cost base. Moreover, when market-creating investments confer positive spillovers, each firm builds its own market more efficiently. Thus, firms can be better off with gray markets when investments confer spillovers, provided the spillover effect is sufficiently large. These results provide a perspective on why firms might not implement control systems to prevent gray market distribution in sectors where investment spillovers are common (e.g., the technology sector) and, more broadly, why gray markets persist in the economy.

Original languageEnglish (US)
Pages (from-to)547-559
Number of pages13
JournalProduction and Operations Management
Volume24
Issue number4
DOIs
StatePublished - Apr 1 2015

Keywords

  • emerging markets
  • gray markets
  • investment spillovers
  • management control systems
  • unauthorized distribution

ASJC Scopus subject areas

  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering
  • Management of Technology and Innovation

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